Banks reduce loans and raise the rates on deposits

The Gulf's largest bank by assets introduces measures to encourage responsible borrowing.

Banks are offering higher interest rates to attract deposits, while at least one lender has taken measures that appear to be aimed at trimming retail loans, according to analysts. The move comes as local banks struggle to maintain large loan portfolios amid a credit crunch that has made it difficult for banks to find short-term funding. Banks increased their lending dramatically over the past year, with loans growing 49 per cent in June from a year earlier. Deposits, meanwhile, increased only by 36 per cent, according to Shuaa Capital, a Dubai-based investment bank. Before the liquidity squeeze hit, banks filled the gap between loans and deposits by selling bonds to raise cash. Most of these bonds were purchased by foreign investors. Now, foreign appetite for debt has dried up, forcing local banks to look to their customers for extra cash. The three month Emirates Interbank Offer Rate (Eibor), the interest rate banks charge each other for loans, climbed to 4.70625. That is more than double its rate less than six months ago. According to Sofia El Boury, an analyst at Shuaa Capital, over the past few weeks some banks have started to raise interest rates on customers' fixed deposits. They may also become more cautious when it comes to making new loans, she said. "It's an effect of the liquidity shortfall. Raising interest rates is one way banks are trying to attract more deposits. And it might work, especially if people begin to view the property market as less than a surefire win," said Andrew Gilmour, an economist at the Samba Financial Group. Emirates NBD, the country's largest bank by assets, launched a campaign yesterday designed to encourage responsible borrowing among its retail customers, which could reduce the amount of loans it issues. Both Emirates Bank and National Bank of Dubai also recently began offering higher promotional rates for consumers willing to deposit money with the banks for one year or longer. In July, Emirates NBD held Dh187 billion in customer loans, compared to Dh157bn in customer deposits. The bank declined to comment. By offering special incentives to anyone willing to deposit money for a fixed period ? anywhere from one week to several years ? they are hoping to raise extra cash they can lend against. Emirates Bank is offering customers a 4.5 per cent return if they deposit Dh100,000 for six months, and five per cent interest if they deposit for one year. The National Bank of Dubai is offering six per cent interest on deposits larger than US$50,000 for one year or longer. Both offers began during the past few weeks, and will expire before the end of the year. [e-mail]